Adawiya Corp regularly makes sales on instalment.

During 2017, one of Adawiya’s sales

amounted to 500,000, costing 300,000, with 20% downpayment received upon approval by the
credit department. To induce the customer, Adawiya offered to grant a 20,000 discount for a
trade-in of a competitor’s old model currently held by the buyer, and which was availed.
Adawiya does not intend to sell the old model as a whole but shall dispose it as scrap with
estimated recoverable value of 15,000 only. For Gross profit recognition, what gross profit rate
based on sales should be used by Adawiya for this transaction?

40%
39%
37%
36%
Ans.
39%

Blue Inc had total sales and cost of goods sold of 1,000,000 and 450,000, respectively,
for the current year. Blue Inc’s trade activities show that sales are made 50% on cash and
50% on instalment basis. The instalment basis sales prices are 20% higher than that of the
cash sales.

What is Blue Inc’s gross profit rate on instalment sales (rounded)?

55%
59%
9%
66%
Ans.
59%

Since there is no reasonable basis for estimating the degree of collectibility, Astor Co.
uses the instalment method of revenue recognition for the following sales:
2017 2016
Sales 900,000 600,000
Collections from:
2016 sales 100,000 200,000
2017 sales 300,000 --

Accounts written off:

2016 sales 150,000 50,000
2017 sales 50,000 --
Gross profit 40% 30%
percentage
 What amount should Astor report as deferred gross profit in its December 31, 2017
balance sheet for the 2016 and 2017 sales?

150,000
160,000
225,000
250,000
Ans.
250,000

The Zonyo Company on October 1, 2018, sold article “A” for P4,000, costing P2,700.
Article “B”, a used article was accepted as down payment and the balance on a
monthly installment payment of P220 starting November 1, 2018. P1,200 was allowed
on the article traded-in. The company estimates reconditioning cost of P80 on this
article and a sales price of P1,100 after such reconditioning. The company normally
expect 20% gross profit on sale of used articles. The company employs the perpetual
method of inventory.

The amount of realized gross profit in 2018 is:

300
400
315
415
Ans.
300

Wood Corp. has a normal gross profit on installment sales of 30%. A 2017 sale resulted
in a default early in 2018. At the date of default, the balance of the installment receivable
was P8,000, and the repossessed merchandise had a fair value of P4,500. Assuming the
repossessed merchandise is to be recorded at fair value, the gain or loss on repossession
should be

0
1,100 loss
1,100 gain
2,500 loss
Ans.
1,100 loss

Gentry Co. uses the installment sales method. When an account had a balance of P3,500, no
further collections could be made and the dining room set was repossessed. At that time, it was
estimated that the dining room set could be sold for P1,000 as repossessed, or for P1,300 if the
company spent P125 reconditioning it. The gross profit rate on this sale was 70%. What is the
gain or loss on repossession?
2,450 loss
2,500 loss
300 gain
125 gain
Ans.
125 gain

Mountain Province, Inc. began operation of its construction division on October 1,

2017, and entered into contracts, one of which is Project Kiltepan with original
contract price was P800,000. Change orders during 2018 added P40,000 to the
original contract price.

The following data pertains to the construction project:

As of As of
September September
30, 2017: 30, 2018:
Costs incurred to date P410,000 720,000
Estimated costs to 410,000 180,000
complete
Billings 440,000 710,000
Cash collections 365,000 625,000

How much shall be reported as realized gross profit at the end of the 2nd year?

(60,000)
(80,000)
(20,000)
(48,000)
Ans.
(20,000)

Kamote Corporation . entered into a construction agreement in 2017 that called for a
contract price of 9,600,000. At the beginning of 2018 , a change order increased the
initial contract price by 480,000 . The company uses the percentage of completion
basis of revenue recognition , in relation to the project ,the following data are
obtained:
2017 2018
Cost incurred to date 4,920,000 8,640,000
Estimated cost to complete 4,920,000 2,160,000
Billings made 5,280,000 8,520,000
Collection made 4,380,000 7,500,000

What gross profit ( loss) should Kamote Corp. recognized in 2018?

120,000 gross profit
240,000 gross profit
480,000 gross profit
720,000gross profit
Ans.
480,000 gross profit

Litangfan, Inc. began operation of its construction division on October 1, 2017, and
entered into contracts, one of which is Project Pulag with contract price of P600,000
and provided for penalties of P10,000 per week for late completion. Project Pulag was
two weeks behind schedule as of 2017, and it was completed five weeks late in
August 2018. The following data pertains to the separate long-term construction
projects in progress:
As of As of
September September
30, 2017: 30, 2018:
Costs incurred to date P360,000 450,000
Estimated costs to 40,000 --
complete
Billings 315,000 560,000
Cash collections 275,000 560,000

How much must be the gross profit to be reported at the end of the first year?

240,000
220,000
180,000
160,000
Ans.
180,000

On December 31, 2017 , RR Inc. authorized GG to operate as a franchisee for an initial franchise
fee of 150,000 . Of his amount, 60,000 was received upon signing the agreement and the balance,
represented by a note, is due in three annual payment of 30,000 beginning December 31, 2018.
The present value on December 31, 2017. The three annual payment appropriately discounted is
72,000. According to the agreement, the non-refundable down payment represents a fair measure
of the services already performed by RR, however substantial future services are required of RR.
Collectibility of the notes is reasonably certain. In RR December 31, 2017, statement of financial
position, unearned franchise fees from GG FRANCHISE should be reported as

90,000
132,000
150,000
72,000
Ans.
72,000
Shake Inc. franchisor, enters into a franchising agreement with Sha, franchisee, on June
30, 2018. The agreement calls for a total franchise fee of 1,000,000 of which 100,000 is
payable upon signing of the contract and the balance in four equal semi-annual
installments. It is agreed that the down payment is non-refundable not withstanding the
lack of substantial performance of initial services by the franchiser.

When Shake Inc , prepares it financial statement as of June 30, 2018, the unearned
franchise fee to be reported is:

0
100,000
900,000
1,000,000
Ans.
1,000,000

On January 1, 2018, Ghastly entered into a franchise agreement with Abra Inc. to sell
their products. The agreement provides for an initial franchise fee of P7,500,000
which is payable as follows: P2,500,000 cash to be paid upon signing the contract,
and the balance in four equal annual installments every December 31, starting
December 31, 2018. Ghastly signs a non interest bearing note for the balance. The
credit rating of the franchisee indicates that the money can be borrowed at 10%. The
present value factor of an ordinary annuity at 10% for 4 periods is 3.1698. the
agreement further provides that the franchisee must pay a continuing franchise fee
equal to 5% of its monthly gross sales. Abra incurred direct cost of P2,326,410 and
indirect costs of P418,500. The franchisee started business operations on July 1, 2018
and was able to generate sales of P3,100,000 as of the end 2018. The first installment
payment was made in due date.
Assuming that the collectability of the note is not reasonably assured, how much is the
net income of the franchisor for the year end December 31, 2018?

2,400,000
2,124,416
1,882,915
1,727,916
Ans.
1,882,915

On January 2, 2018, JERICHO Company signed an agreement to operate as a

franchisee of CONVERSE PRODUCTS, INC., for an initial franchise fee of P10, 000,
000 for 10 years. Of this amount, P2, 000, 000 was paid when the agreement was
signed and the balance payable in four annual payments beginning on December 30,
2018. JERICHO signed a non-interest bearing note for the balance.
 JERICHO’s rating indicates that it can borrow money at 24% for the loan of this type.
Present value of an annuity of 1 for 4 periods at 24% is 2. 40.
Assume that substantial services amounting to P1, 020, 000 had already been rendered
by CONVERSE PRODUCTS. Indirect franchise cost paid amounted to P272, 000.

Calculate the realized gross profit for 2018 assuming collection of the note is not
reasonably assured

P3,240,000
P2, 420,800
P3,400,000
2,306,880
Ans.
P2, 420,800

Saisaki Corp granted a franchise to Mity for an initial franchise fee of 1,000,000. The agreement
provides that Saisaki has the options within one year to acquire franchisee business, and it seems
certain that Saisaki will exercise this options. On Saisaki’s books, how should the initials fee be
recorded?

Deferred and treated as reduction in Saisaki investments when the options is exercise
Realized revenue
Extra ordinary revenue
Deferred revenue to be amortized
Ans.
Deferred and treated as reduction in Saisaki investments when the options is exercise

At the beginning of the year, TMT got the franchise of Lindon’s, a known steakhouse of
upscale patronage. The franchise agreement required a P500,000 franchise fee payable
P100,000 upon signing of the agreement and the balance in four annual installments
starting the end of the current year. At present value using 12% as discount rate, the four
installments would approximate P199,650. The fees once paid are not refundable. Lindon
has the option to purchase the franchise operation after ten years. The franchise maybe
cancelled subject to the provision of the agreement. Should there be unpaid franchise fee
attributable to the balance of main fee (P500,000), same would become due and
demandable upon cancellation. Further, the franchisor is entitled to a 5% fee on gross
sales payable monthly within the first ten days of the following month.

The Credit Bureau rated TMT as AAA credit rating. The balance of the franchise fee was
guaranteed by a commercial bank.
If the franchise’s first year of operation yielded gross sales of P9,000,000, Lindon’s
earned franchise fees of the first year is

P 950,000
P 749,650
P 450,000
P 299,650
Ans.
P 450,000

Laica authorized Dashon to operate as her franchisee. The agreement included a provision
whereby Dashon may acquire equipment directly from Laica at a price materially lower than
prevailing price for an equivalent unit in the market. How should Laica account for this
component of the franchise agreement?

Noted through a memorandum entry

The price difference must be accounted as a reduction in profit

The price difference must be deducted from the initial franchise fee and deferred for revenue
recognition

The eventual sale of Equipment shall be recorded at market value

Ans.
The price difference must be deducted from the initial franchise fee and deferred for revenue
recognition

Cherry Inc. charges an initial franchise fee of 115,000 with 25,000 paid when the agreement is
signed and the balance in five annual payments. The present value of the future payments ,
discounted at 10% is 68,234. The franchisee has the options to purchase 15,000 of equipment for
12,000 from the franchisor. Cherry has substantially provided all initial services required and
collectability of the payments is reasonably assured . The amount of revenue from franchise fees
is:

25,000
90,234
93,234
115,000
Ans.
90,234